The government seems to be moving closer to a policy of using superannuation savings to partially pay for the forthcoming massive increase in aged care spending.
While no details have been provided yet, there are several ways this policy could be achieved. Hopefully, Labor will focus on incentivising people to save for age care — rather than confiscating or increasing taxes on super to achieve this outcome.
After all, using super for aged care makes a lot of sense: superannuation funds retirement, and aged care is an expense mostly incurred by retirees. It is also undeniable that the government has funded the bulk of the increase in aged care expenditure in recent years, not the users.
It would not be fair for younger taxpayers to stump up even more money to fund retirement expenses when a system already exists to pay for retirement.
But this policy highlights several other flaws in the superannuation system that could be addressed at the same time.
The first is inconsistency in what insurance can be obtained within super. Currently, many people have access to income protection insurance, TPD and life insurance through super; although it is worth noting that historically not all policies offered have been good value for money.
However, while some super funds have partnerships with health insurance providers, private health insurance cannot be paid for through superannuation. This makes little sense.
Although private health insurance is not a retirement expense per se, neither is income protection insurance. You might argue that TPD and income protection insurance safeguard against circumstances of need where people might otherwise drain their super — but the same is true for medical expenses.
Private health insurance also provides a greater benefit to those in, or approaching, retirement.
The entire rationale for the government’s Lifetime Health Cover (LHC) loading, which penalises people for not having private health insurance before the age of 31, is to bring a younger cohort into the system to balance the costs against the main health system users: older Australians.
There are added benefits for the government as well. Currently the government provides a separate incentive regime to take out private health insurance. Allowing people to use concessionally-taxed superannuation to purchase private health cover incorporates its own incentive; saving taxpayers money.
Cynically, it might also encourage competition: super funds and health insurers would be effectively competing for the same pot of funds.
It would also provide a significant assistance to those struggling with the cost-of-living surge, or others for whom private health insurance would be beneficial but may be too expensive. Paying for it through super would alleviate the need to front-up cash for premiums.
These inconsistencies in insurance while in accumulation also feed into another flaw in the system. Too little policy time and effort has actually been focused on the supposed goal of the super system: maximising living standards in retirement.
In fact, to the extent that the issue of living standards is considered, it is usually from the perspective of maximising super balances at the point of retirement. But that lens is superficial at best, and misleading at worst. It would be like awarding the winner of a race based on how they approached the start line.
Aged care is not the only major expense in retirement. Those in, or nearing, retirement should be incentivised to investigate alternative products that could boost living standards — for example: shared equity release schemes for homeowners or longevity insurance, both of which are available overseas.
But these products have little or no market in Australia. Why not?
One big problem is that the components of the retirement income sector don’t work well together. The social security settings actively discourage any kind of innovation that might jeopardise access to the age pension.
For example: despite a strong desire among retirees to age in place, releasing equity from your home exposes it to the pension eligibility tests (although some policies that have sought to exempt these proceeds at times).
Meanwhile our planning system prevents the construction of age-appropriate housing in the communities where these retirees live, and our tax system whacks downsizers with a huge stamp duty bill when purchasing a new residence.
That’s before we even start on the issues facing residential aged care communities.
A holistic view of the retirement system eludes us time and time again.
For many retirees, the pension forms not only a safety net but a ready stream of liquidity to meet living expenses; enabling them to grow their equity in their home (and for some even retain equity in their super) over their retirement.
While no-one would argue that the age pension represents a glamourous or luxurious lifestyle, it does provide an adequate standard of living for many, especially those who own their own home and live in a relatively low-cost part of Australia.
In addition, because it is indexed to inflation and wages, it immunises pensioners against rising cost of living pressures. For many, life on the pension is enough… if only enough.
But why would Australia tolerate the imposition of such a paternalistic, intrusive scheme as compulsory superannuation to then willingly accept that most will just default to the mediocrity of the pension?
If superannuation is not boosting living standards in retirement — even if only because people are choosing not to use it that way — the system has no purpose at all.
Ultimately, the bulk of the problems and limitations in the superannuation system arise because the loudest voices in the debate have been the funds (who want to capture a larger percentage of income and feast on the fees) and the ‘ever-more-revenue’ crowd (who want to tax the system to its knees).
Though the government is unlikely to listen, given they are largely in thrall to the industry super funds, a debate over the use of super for age care will allow us to re-open the discussion on the efficiency of the super system as a whole. And that is an opportunity worth seizing.
Simon Cowan is Research Director at the Centre for Independent Studies.
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